Fraud…Court finds Sino Forest founder guilty

Posted by Jo English on 21st March 2018

In Canada, an Ontario Superior Court judge has found Sino-Forest Corp’s co-founder and former CEO Allen Chan guilty of fraud, breach of fiduciary duty and negligence and ordered him to pay more than $2.6 billion.

Justice Michael Penny found that Allen Chan “abused his unique position as a fiduciary to orchestrate an extremely large and complex fraud” that caused the timber company to lose billions.

Penny’s decision last week is the latest development in one of the country’s largest corporate fraud sagas, which has landed the troubled company’s executives tussling with the Ontario Securities Commission (OSC) and auditors for years.

The civil case that Penny presided over was filed in 2014 by SFC Litigation Trust, which was acting on behalf of Sino-Forest’s creditors.

In his decision, Penny said, “Mr. Chan, rather than directing Sino-Forest’s spending on legitimate business operations, poured hundreds of millions of dollars into fictitious or over-valued lines of business where he engaged in undisclosed related-party transactions and funnelled funds to entities that he secretly controlled.”

In an effort “to deter the defendant and others from similar misconduct in the future, and to mark the community’s collective condemnation of what has happened,” Penny ordered Chan to pay $2.63 billion in damages and $5 million in punitive damages.

Sino-Forest first became embroiled in lawsuits and an Ontario Securities Commission investigation after Muddy Waters LLC released a 2011 report suggesting it was a Ponzi scheme that exaggerates its assets.

A year later it filed for bankruptcy protection, put itself up for sale and delisted from the Toronto Stock Exchange.

In 2017, the OSC found Chan and other Sino-Forest executives defrauded investors, misled investigators and engaged in deceitful and dishonest conduct.

That same year the OSC reached a $8-million settlement with accounting firm Ernst & Young, who it had accused of preparing a negligent audit of Sino-Forest and shoe manufacturer Zungui Haixi Corp., which both faced criticism for their financial practices.